1031 Exchange and Realtors

In a 1031 exchange, a taxpayer sells property at a gain and rather than pay tax on the gain, they take the money and buy a replacement property. If they follow the safe harbor rules of IRC section 1031, the tax on the gain gets deferred and reinvested as “equity” into the new property. This is such an advantage, yet many in the real estate community still don't know much about them or how to conduct one. There’s this “gap” between what the investor doesn’t know about 1031 and those they work with. As a Realtor® in today’s market, imagine what it would mean to you in terms of commission dollars if you could bridge that gap by informing the investor about the advantages of a 1031 exchange.

Think about that. In a 1031 exchange the taxpayer sells a property, and in a short period of time must buy a new one. If you are the listing Realtor® and assist them with both sides, you can conveniently inject yourself into the other side of the transaction and, in effect, quickly double your commissions. So how do you capture those transactions and capitalize?

Once you acquire 1031 education, keep up by attending more advanced 1031 classes. In this specialty, the more you know the more you earn. There are tax strategies and advanced topics on exchanges, such as the reverse exchange, that can place you in a position to take part in more transactions.

Partner with a knowledgeable and reputable Qualified Intermediary

As you acquire the 1031 exchange basics, start researching for the right Qualified Intermediary (QI) to work with. A QI is a required part of the exchange as dictated by the IRS in section 1031. The QI prepares all the documents and provides instructions to the closing agents. Above all else, the QI holds the money in between the sale of the old property and the buy of the new one. You will be referring your client to them so make sure they are knowledgeable and keep their money safe at all times during the exchange. Ask them questions such as where do they hold the money, and if they commingle funds. You want to make sure the QI does NOT commingle. Also, do they provide exchange consulting as part of their service? Most do not. Also, make sure they are licensed as CPA’s preferably, or another professional subject to ethics and morals equivalent to a CPA, such as an attorney.

Next, start marketing yourself as a 1031 exchange specialist Realtor® so you can place yourself in a position to receive inquiries about them. For example, on your business card mention 1031 exchanges in a strategic area so future clients can see it and inquire about it. Ask other Realtors® about their experiences with a 1031 exchange and how they were able to be successful with them.

As mentioned in the beginning, the main benefit of doing a 1031 exchange is not to pay the capital gains tax on the sale. However, in addition to the tax savings there are many other reasons why the client will exchange. For example, if the client owns fully depreciated property and have run dry of the tax depreciation deductions, they may desire to sell and replace it with another property with a higher cost basis to acquire future depreciation deductions. Other examples are:

1. They are moving to another state and need to move their investment property with them
2. They want to diversify their built in equity by acquiring more than one replacement
3. Perhaps they have too many properties and need to consolidate their holdings
4. Exchange land for income producing real estate to gain cash flow

There are countless other reasons why people exchange. With each reason comes a strategy and opportunity to market to a certain segment of the real estate investment community in search of a 1031.

One Realtor® I worked with figured out that to find future 1031 exchange clients, all she had to do was find the ones holding appreciated real estate since those folks were the ones eligible to do an exchange. What she did was search the appraiser’s website for property owners where homestead was not claimed (since 1031 exchanges apply to investment property, not personal). Next, she researched if they owned them for many years by looking at the deed transfers, at least 5 or 10 years out. Chances were those candidates were the highest for 1031 exchanges due to the potential appreciation. She started a letter campaign outlining the potential gain by showing what the estimated value of their property was based on CMA’s, and comparing them to the cost per the transferred deed to determine an estimated profit. From there, she applied a tax rate of 15% for the capital gains tax. She was able to demonstrate that if they were holding back on their decision to sell because of taxes, she could show them a way out through a 1031 exchange. She opened their eyes to something no one else showed them before. Do you think she obtains 1031 exchange listings? This Realtor® is quite successful today and averages well in commissions annually.

What you do not want to do is become a tax advisor. Always make sure you recommend to the client to speak with their tax preparer, CPA or attorney before contemplating a 1031 exchange.

Selling real estate is never easy, but with education and a willingness to go the extra distance, you can acquire keys to success in this profession. With 1031 exchanges as a tool in your arsenal, you can place yourself miles ahead of your competition by marketing yourself as a 1031 exchange specialist Realtor®.

A note about Foreign Sellers of U.S. Real Estate

1031 exchanges are available to all taxpayers, both foreign and domestic. For this reason, a 1031 exchange is an option for foreign sellers who are often subject to the 10% FIRPTA taxes upon the sale of their U.S. real property interest. Properly structured, a 1031 exchange is a perfectly acceptable method to defer tax on the sale and is an approved exemption choice to avoid the 10% FIRPTA.